Can Corbyn help the UK avoid the Ice-cream Seller Problem?

There is an example of market failure in Economics called, as the title of this blog suggests, “The Ice-cream Seller Problem” (a.k.a. Hotelling’s Law). Consider a long strand of sand evenly covered with holidaying people. A reasonable proportion of which would pay good money for an ice-cream, but walking too far is a disincentive. The market thoughtfully provides a vendor, let’s call them Sam, who analyses the situation and decides that the best place to set up is the middle of the beach so as to be as close as possible to as many as possible.

Decisions, decisions

Suppose another vendor, let’s call them Jo, is attracted by the prospect of super-normal profits. (In micro-economics anyone earning more than a subsistence level is making super-normal profits – in the long-run, free market competition drives all profits and wages to a subsistence or break-even level. That is why in a free-market, high pay does not follow the social worth of the job, or even the level of productivity of the workforce, but reflects how successfully an industry keeps out the competition. It is more difficult to become a banker than a nurse, hence bankers are paid more.)

Anyway, back to ice-cream. Knowing people will always walk to the nearest ice-cream seller, Jo, the new vendor will always set up as close as possible to Sam, the incumbent vendor, in the centre of the beach. This is because, if Jo sets up markedly to the left (for example) of the Sam, Jo has already lost half the market – everyone to the right of the centre. Meantime, some of those to the left of centre will still be closer to Sam.

Ultimately, we are left with a beach uniformly covered with ice-cream desirous holiday makers where both ice-cream sellers are clustered in the middle. This is inefficient because, if Jo and Sam were to distribute themselves more evenly across the beach, they could maintain market share while reducing their distance from the customer. In fact, sales might actually increase as people at the extreme edges of the beach who were previously desirous of ice-cream, but couldn’t be bothered to walk the distance to the centre, might now be served. In economic parlance, any change leaving at least one group of people better off without leaving anyone worse off is called a Pareto improvement. It is, in short, something for nothing! There is, however, no market mechanism to achieve this more efficient outcome.

In sum, the Ice-cream Seller Problem describes how the market produces sub-optimal and inefficient clustering.

However, what is overlooked is that, in politics, it is often not the getting into power which is important, it is the offering of alternatives. UKIP is unlikely ever to form a government of the UK, for example, but their very presence has shaped the debate on migration and the EU. Similarly, in his recent budget, the Chancellor apparently attempted to recast the Conservatives as the “workers’ party”, adopting many of Miliband’s policies. Clearly, it is possible to have an influence, even in opposition. Corbyn, if he becomes leader of the Labour Party, might well motivate the Conservatives to consider his approach to political-economy. He might even redefine what “the centre” actually is.